Tu Beer Hai – Startup Bubble is Bursting

This post is by Khalid Raza, Talent Development Leader, IBM 

It was my friend’s cute chubby daughter’s birthday party, almost one year ago and our group of friends, after dinner, were discussing the future of Indian Startup scene, while traffic on 100 feet road continued to create more noise and pollution but did not move an inch.

‘Tu Beer Hai’. What is that? Watch the video

Disclaimer: I believe in the potential of startups and as a consumer of many of them (For example: Uber, Inshorts, Flipkart, TinyOwl, Quikr, …and many more) I feel they have made a difference and are needed.

Yesterday I opened a nifty startup news app to read that Flipkart deferred (read declined) the joining of some very glossy IIM A MBA grads, to whom they promised hefty packages (and created artificial talent wars). While I understand that there is some internal structuring going on but a company which is leading the current e-commerce scene, not only in terms of losses, really has not gotten its act together. In April, Puneet Soni, Flipkart’s Chief Product Officer and expensive import from Silicon valley, left Flipkart within 14 months of joining.

Snapdeal and Flipkart have reported losses in financial year 2014-15. Snapdeal’s financial report revealed a loss of Rs 1,328.01 crore.  The highest loss reported last financial year was by Flipkart at Rs 2,000 crore.

2 days ago, Anand Chandrasekaran left Snapdeal. Anand, a former Yahoo executive, returned to India in 2014 to run product for the carrier Bharti Airtel. He jumped to Snapdeal last June, and led an effort to integrate more services, like Uber, into the company’s flagship app, a model similar to China’s popular WeChat.

3 days ago, Tiny Owl, another start up shut all his India operations, except Mumbai. Wonder why that was left. The Mumbai-based company was operational in 11 cities, including Delhi-NCR, Bengaluru and Chennai, but will now operate only in select areas of its home city. It laid off 160 employees in August. In November, it shut operations in four cities — Pune, Delhi, Hyderabad, and Chennai, and laid off another 100 employees.

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Housing.com, which is backed by SoftBank and witnessed a management change after founder Rahul Yadav was evicted following a boardroom battle last year, posted a loss of Rs 279 crore on a revenue of Rs 12.7 crore, up from Rs 48.9 crore in the previous year.

Sulekha went to Rs 98.5 crore from Rs 80.9 crore, and AskMe’s revenues grew to Rs 43.4 crore from Rs 42.7 crore. Losses, however, went up massively, with Quikr and AskMe posting a combined loss of Rs 704.9 crore during FY15, up from Rs 380.9 crore in the previous year.

Zomato, which posted revenue of Rs 96.7 crore during FY15 had an employee cost of Rs 130.3 crore, while FoodPanda, with revenue of Rs 4.6 crore, had an employee cost of Rs 5 crore. Earlier this week, however, Zomato said it has reached operational profitability in six markets, including India.

Uff, stop it! So whats now?

The startup bubble is bursting!

Let’s understand what I mean here: The valuations have reached a bubble stage and are mostly inflated. Take this for an example: Mr A floats a startup to design a place where people will come and ‘ponder’ to generate world changing technology. The startup is called ‘iPonder‘. Mr A tells you that we will get 1 idea from each ‘Ponder Pod’ and every idea will be sold for $50k and hence we will be profitable in 2 years. We need $100k to make these ‘Ponder Pods’ in all the places where ‘Ponderers’ will come and ponder. You agree to invest as you have so much money that you don’t even know where to keep. You invest $200k and with projections for next 1 year you will have revenue of 50*12=$600k. That’s your inflated valuation.

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The valuation bubble is a global one. Imagine the Dotcom Burst. Companies with no real business models will die anyway but this burst will also kill some genuine businesses.

The losses of the top 22 online start-ups in the country soared by 293% at Rs 7,884 crore for a combined revenue of Rs 16,199 crore for the financial year ended March 2015.

Bloated spending on advertisement to attract customers in an increasingly competitive atmosphere led to the whopping hike in losses. This year, losses could mount further as these startups continued to spend money on advertisements and discounts to lure customers.

Is there a way out?

Kill the hype first! No one succeeds  before success happens – but the ‘successful’ tag attached to the startup even before they break-even is almost crazy. Don’t invite them to your forums and shower awards. I remember seeing Pranay Chulet, CEO of Quikr, receiving an award in an NDTV event and he shared the story how he got inspired by Craig’s List and came to India and started the same business under the name Quikr. So imagine this – the idea is not original and is in losses and we award him with Jio Economic Startup Award! I could not help but laugh in amazement.

Keep it simple: See whether they have a tangible business to start with. And see if they have made profits or not. Rest all is just faff!

…and the valuations?

If you have to believe in their individual valuations, it means all of them will win. The total market cap is more than the sum of the four individual valuations.

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Lack of Leadership at the top

In this start-up mela, too many aspiring ‘self-declared entrepreneurs’ who have nothing but an idea, with no real entrepreneurial ability have entered the game. They lack everything that is required to run a successful company, including business acumen, maturity and experience. Just look at the response from Flipkart’s CEO, Binny Bansal, when asked If there is anything he would like to correct. He said, “My focus is on where we are and what we need to do. Our app-only strategy was absolutely right, you can’t look at everything in hindsight and say it’s right or wrong. But there are learnings like a bunch of customers who still prefer to shop on desktops and people who don’t want multiple apps on their phones.

He says something, and in the same breath contradicts himself. If the app-only strategy was right, why did Flipkart retract it? Anyways, let him be – remember, he had the idea guys!

So what’s the final verdict?

The over-hyped and over-celebrated start-up parade should be watched with keen eyes. Investors should see the ‘practical profitability’ backed by entrepreneurial exuberance. However, keep those enthu-cutlet entrepreneurs away from management and leadership. Hire seasoned CxO to run the company. Just because Shah Jahan had the idea, he did not build the Taj Mahal!

And you, as a user, just relax and enjoy those ‘freebies’ these startups give you. We all know you are not loyal.

Disclaimer: This is an Influencer post. The statements, opinions and data contained in these publications are solely those of the individual authors and contributors and not of iamwire and the editor(s). This article was initially published here.

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